Plant-Based Alternatives To Put Pressure On Dairy

Dairy remains a key component of total food and drink spending in most countries, with the average global consumer estimated to spend 13.3% of its food budget on dairy products in 2020.

Growing demand for plant-based dairy alternatives is leading large dairy and FMCG firms to diversify their product portfolios, demonstrating the disruptive nature and long-term implications this trend will have.

This trend is reflected by a sluggish outlook for liquid milk consumption in North America and Western Europe, with plant-based dairy alternatives are projected to go mainstream in emerging markets over the next decade.

At Fitch Solutions, we believe that dairy will follow a similar development trajectory as meat and meat alternatives, with the next dairy frontier being "lab-grown dairy".

Dairy remains a key component of total food and drink spending in most countries worldwide (with the notable exception of sub-Saharan Africa), with the average global consumer estimated to spend 13.3% of its food budget on dairy products in 2020. This makes dairy the third biggest food spending category, after meat and poultry (accounting for 22%) and bread, rice and cereals (accounting for 15.1%). China, the US and India lead in terms of dairy sales, reaching USD175.7bn, USD123.1bn and USD78.6bn respectively in 2020. We project spending levels on dairy to expand by 6.3% CAGR over our medium term forecast, reaching USD1.1tr in 2023 up from USD908.1bn in 2020.

While our global growth outlook for dairy sales remains bright, we project conventional dairy (dairy made from animal-milk) to increasingly come under pressure over our medium term forecast. This will be driven by growing consumer demand for plant-based dairy alternatives, such as products made from almond, oat, soy and rice. Plant-based milk alternatives have already been adopted by a growing number of consumers in developed states in recent years, with Swedish oat milk producer Oatly reporting a 65% growth in sales, reaching SEK1,028mn (USD118mn) in 2018 (latest available data), while Danone (owns Alpro) reported that its plant-based division nearly hit the EUR2bn (USD2.4bn) mark in 2018 (latest available data). Danone states that plant-based products accounted for 15% of its dairy division in 2018 and aims to triple this by 2025. As a result, we project liquid milk consumption in developed markets to be stagnant over the medium term. We expect plant-based milk alternatives to go mainstream in emerging markets over the next decade.

Health worries: There has been increased media coverage of studies that link dairy (made from animal-milk) consumption to a variety of health problems, including risk of cancer (specifically prostate, ovarian and breast cancers), high cholesterol levels, and skin problems (including acne), while there are also concerns about milk containing hormones and antibiotics. Additionally, there is an augmented awareness of lactose intolerance among global consumers, partly driven by self-diagnosis through the growing availability of personalised genetic testing services.

Environmental impact: The UN Food and Agriculture Organization (FAO) reports that the dairy sector, which includes milk production, processing and transportation, accounts for 2.7% of total greenhouse gas emissions, while also putting a strain on global water resources. Simultaneously, studies show that the carbon footprint of plant-based milk alternatives is significantly lower (see visual below).

Ethical concerns: There is a rising consumer concern about the welfare of dairy cows, especially around practices such as mother-and-calf separation, slaughter of male calves and pregnancy by insemination.

Food security: There is increasing need for diversification to meet demand as the global population continues to expand.

Growing Interest In Lactose Intolerance And Milk Alternatives

Global - Google Search Interest Over Time

Numbers represent search interest relative to the highest point on the chart. A value of 100 is the peak popularity for the term. Source: Google, Fitch Solutions

Environmental Impact Of Milk And Dairy Alternatives

Emissions (kg), Land Use (sq m), Water Use (L)

Source: BBC, Fitch Solutions

As a result of the growing demand for plant-based dairy alternatives, large dairy and FMCG firms are diversifying their product portfolios, demonstrating the disruptive and long-term implications this trend will have. Below are measures large dairy and FMCG firms have taken in 2019 to tap into the growing demand for plant-based dairy alternatives:

DAIRY FIRMS DEVELOP PLANT-BASED BUSINESS IN 2019

Company

Development

Chobani

In November, Chobani launched an oat-based range, including milk alternatives (both regular and one specifically designed for coffee and tea), and yogurt alternatives in different flavors. Through this launch, Chobani, which is the leading Greek yogurt brand in the US, enters the plant-based dairy alternatives market.

Danone

In December, Danone's venture fund backed plant-based yogurt brand Hälsa, while in October it acquired a minority stake in Forager Project, a plant-based food and beverage start-up based in San Francisco. Additionally, Danone started rolling out a plant-based version of its Activia yogurt, called Activia 100% Vegetal. The plant-based yogurt was launched in Austria, Czech Republic, France, Germany, Italy and Spain, with more markets to follow. In July, Danone's So Delicious Dairy Free launched oat-based yogurt alternatives in the US.

General Mills

In December, General Mills entered the plant-based dairy alternative segment with the launch of a coconut-based yogurt alternative under the Oui By Yoplait brand.

Unilever

In March, Unilever's low-calorie ice cream brand Breyers launched dairy-free variants in the UK due to strong demand for vegan products in the country.

Blue Diamond Growers

In May, Blue Diamond moved into the plant-based dairy alternative market through the launch of an almond-based yogurt alternative range. The product is available with different toppings including, toasted almonds, honey roasted almond and granola, and sea salt caramel and pretzel.

Source: Company Sources, Fitch Solutions

What's Next?

With an array of large food companies expanding into the plant-based dairy alternatives market, we project this area to become increasingly mainstream and competitive over our medium-term forecast period, especially in developed markets. We also believe that dairy will follow a similar development trajectory as meat and meat alternatives, with the next dairy frontier being "lab-grown dairy".

California-based start-up Perfect Day has already commenced with the development of animal-free dairy products. It uses genetically modified microflora that produces whey and casein proteins through a fermentation process. Perfect Day's protein is claimed to be exactly the same as the protein that originates from cows. The company states that its focus in 2020 will be commercializing the protein in multiple continents through a variety of commercial partnerships.